Big Swinging Dicks

We recently learned that a bond basis trader at Tudor blew up to the tune of $140 million. Far from the biggest hedge fund blowup in the world, but it’s material.

I actually don’t know much about the bond basis trade. I know how it works in principle—you’re short futures and long cash (in this case, the cheapest to deliver bond) and wait for it to converge. I used to be a basis trader myself, but in stocks—doing index arbitrage. In index arb, you’re short S&P futures and long the basket of stocks in giant size, which means that you have an enormous amount of interest rate and dividend risk. We never bothered to hedge the dividend risk, but we did our best to hedge interest rates. It helps if interest rates are going lower.

Anyway, markets go down, shit gets weird, and things blow up. So this is an interesting game theory problem if you are a basis trader. Do you use 100x leverage, and make $100 million a year, knowing that once every 20 years you’re going to blow up? Or, do you use 20x leverage, make $20 million a year, and survive the inevitable blowup? That’s an easy one—if you’re getting paid roughly 10% of what you make, and you can personally make $10 million a year for 15 years, you don’t really care if you blow up. I mean, you care—there is a loss of face, and shame involved—but someone will hire you, somewhere. They always do. Leveraging up as much as you can is actually rational.

And the reason that is, is because it’s an old saw on Wall Street that if you lose big, you can win big. Without naming names, you probably know many historical examples of traders who blew sky-high and had no problems securing future employment. I’ll give you one you may not know—Larry Fink, CEO of Blackrock, who once lost $100 million in MBS back in the 1980s at First Boston (when that was a lot of money). In this stupid culture, it’s almost a badge of honor to get your ass handed to you.

That has never been my philosophy. Don’t get me wrong—I like to go big game hunting every once in a while. I know how to crank up the risk when the opportunities are asymmetric. In finance, you can risk a little to make a lot, or you can risk a lot to make a little—there are no other possibilities. You can sell options, or you can buy options. You can explicitly buy or sell options, or you can implicitly buy or sell options. There is optionality in everything we do. Most people pick up nickels in front of a steamroller, and when they get run over by a steamroller, they say, “How was I supposed to know?”

The same is true in the pundit world as well. You have guys (Tom Lee for starters) who are permabulls on stocks, and while this works 99% of the time, once every ten years, the market crashes, and they say, “How was I supposed to know?” Then they go back to being long stocks. Pretty soon everyone forgets about the crash, and they resume selling subscriptions. It’s a genius business model—but intellectually dishonest. Then there are the permabears, who are vindicated by a crash, and trade off that for the rest of their careers. Also intellectually dishonest. The pundits/strategists who time the market, hitting singles and doubles (like myself), even successfully, are typically the least successful. Nobody knows what they believe.

There is a lot to be said for hitting singles and doubles. Speaking of Tudor, everyone remembers Paul Tudor Jones’ Crash of 1987 trade. He’s in Cooperstown. Or breaking the bank of England. Everyone wants to do stuff like this—pure ego. Managing money really is about hitting singles and doubles, and racking up small wins over time, which, together, can add up to a pretty good year. You have pretty good year after pretty good year, you will have no trouble gathering assets. Hundreds of millions. Billions. And no one will know your name, which is for the best.

The core of this essay is a concept known as humility. Knowledge that:

· The market is bigger than you

· You are not that smart

· You are not that important

· 99% of the world has no interest in what you are doing

· Character and credibility counts

I’ve had this experience several times in my life, and I’m sure you have, too: Joe trader or Joe real estate agent or Joe salesman is good at his job and starts running into a little success, and then turns into an insufferable prick. You don’t need to ask how awesome they are—they’ll tell you. How you handle success is actually more important than how you handle failure. Success affects people differently. I’m sure you know some douchebag rich people. It’s not that all rich people are douchebags—it’s that money has a tendency to magnify whatever character defects they may have had in the first place. If you are poor and an egomaniac with an inferiority complex, you will be rich and a bigger egomaniac with an inferiority complex. You have to remain humble in the markets, because karma has everyone’s address. I’m sure most people have had the experience of having a good run trading. The seeds of the bad run are sown in the good run. You start thinking you are a genius, you start taking too much risk, and incomprehensible demoralization is the result. If your friends and family can’t bring you back to earth, the market will do it for you.

“Big Swinging Dicks,” or BSDs, was popularized by Michael Lewis in Liar’s Poker. Yes, I read the book. That book is stale and expired by this point, but the personalities are not. The Human Piranha, etc. I will say this again—money and success exaggerate defects of character. They were present before the money—you simply couldn’t see them. If you are paid a million dollars, you probably think you are worth a million dollars. Not that there is anything wrong with that, in its place—if you are paid a million dollars, you don’t want to think you are worth fifty thousand dollars, because you will never succeed. The goal is to be right-sized, to have an accurate appraisal of your worth. A lot of people look at Ackman getting his nose in politics and wonder what the hell he is up to. Well. Ackman is worth $9.3 billion. He is a gifted investor. He is thorough, diligent, and patient. He also has good IQ and EQ. He has beliefs, as we all do. The Twitter followers are worth more to him than the $9.3 billion, at this point. God help us all if that ever happens to us. Also, he is turning out to be not so good at the politics thing.

If you told me in 2005 that in 2025 I’d write that our ego is our greatest enemy, I would have shit in your hat. Back then, I wanted to be a Big Swinging Dick. That is no longer my ambition. All I want is to pay off my house, to buy a place in Miami, to have some play around money, and to give the rest away. And this isn’t virtue signaling—this is really what I want. There was a point in my life where I wanted to own a nightclub, but I am too old for that now. If you want to effect change in the world, well, there is a whole science around this, but you have to do it incrementally. And our influence is extraordinarily small. Being rich and successful means you get to fly private and you never have to stand in line for stuff. You have earned it. But you don’t get to tell everyone what to do and what to think.

Shorter: don’t be an asshole.

And not being an asshole means this: you have to be patient with stupid people who waste your time, instead of telling them that they are stupid. There are some rich people who would read some receptionist the riot act because things weren’t happening fast enough for their taste. No, you have to stand there like a chump, and wait for Kaylee to finish wasting your time. One of my favorite quotes in movie history is from Ex Machina, where Oscar Isaac’s hot Asian robot spills wine all over the place, and he loses his cool and says, “No matter how rich you get, shit goes wrong.” Which is a dose of perspective that so many people need. My advice is to own cats. Cats don’t care if you’re worth $9.3 billion, they’re going to do what the hell they want to do.